Weak rand makes Old Mutual bad risk

Games Workshop; ML Laboratories
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The Independent Online

For Old Mutual, one of those stocks which have their main listing in London but do the vast majority of their business elsewhere, currency is king. Unhappily, its business is concentrated in South Africa, where the slide in the value of the rand and unsavoury political developments at home and in the neighbourhood caused the company's shares to drop 36 per cent last year.

Jim Sutcliffe, the new chief executive, is well aware of its need to diversify and yesterday gave encouraging news on the huge American asset management business it bought in late 2000 for $2.2bn (£1.5bn).

The business, which operates as Old Mutual Asset Managers (OMAM) and Pilgrim Baxter, has been shaken up and brought under stricter central control. The result was a 2.5 per cent net increase in the inflow of assets in 2001, their strongest performance in a decade.

But the tough market conditions of 2001 and the sale of less tasty bits of the American acquisition created a 16 per cent slump in total assets under management. Old Mutual's shares fell 3.5p to 94.5p.

Old Mutual also owns Gerrard, Britain's biggest private client business, which, along with OMAM, might drive the shares this year if there is the expected upturn in the market.

Except that, back at the ranch, things look considerably more problematic. Old Mutual is already the largest financial services group in South Africa, with 30 per cent of the life insurance market and controlling stakes in the country's biggest general insurer and Nedcor, a leading bank. These businesses are slick operations, and the company's dominance means the opportunities for growth in South Africa are scant. With 80 per cent of profits coming from the country, it will also be impossible for Old Mutual to hedge against the faltering rand.

The depreciation of the currency also poses problems for South Africa's attack on inflation which, if not brought under control, could make consumers increasingly unwilling to save, hitting Old Mutual's new business figures in its core market.

Old Mutual trades at a 14 per cent discount to its embedded value – a measure similar to net asset value – making it apparently cheap compared to most giant insurers which trade at an average 1.5 times their embedded value. But its exposure to turbulence at home while still being a relative tiddler abroad makes it too risky. Avoid.

Games Workshop

Games Workshop, the maker and retailer of war games, is a Hobby business, not a Hobbit business. The directors spent lots of time yesterday trying to make that clear, concerned that the hype surrounding the launch of their movie tie-in Lord of the Rings game has driven the shares too high.

The directors, the sales force and its customers are passionate about the Hobby. With a capital H. "It involves commitment, collection, craft or manual skills and imagination. Someone who is involved in the Games Workshop Hobby collects large numbers of miniatures, paints them, modifies them, builds terrain and war games with them in our imaginary universe. This involves huge amounts of time."

So with customers hooked on its famous Warhammer games, revenues and profits are back on an impressive trajectory. In the half-year to 2 December, turnover was up 21 per cent to £51.6m, with pre-tax profits up 48 per cent to £6.0m. That was with just a month's contribution from The Lord of the Rings.

The recovery from an earlier sales wobble in the UK – effected, perversely, by reducing the in-store sales pressure and making shops more welcoming to war games fans – should give confidence that the directors know what they are playing at.

Analysts are instructed not to get carried away with talk that Lord of the Rings could become the biggest thing in the toy box. Their forecasts for earnings growth of about 17 per cent per annum over five years may still be too low. The shares, though, were up 27.5p to 545p yesterday and trade at about 21 times 2002 earnings. That is high enough for the time being.

ML Laboratories

Going for a song: one AIDS treatment which involves having a litre of liquid pumped into your stomach; one intravaginal HIV-prevention cream; one DNA factory. Call ML Laboratories for further details.

ML Labs has proved a disastrous stock market investment, and the chairman Kevin Leech is at least apologetic. He is days away from the culmination of a year-long search to improve shareholder value and, in addition to putting the For Sale sign over a swathe of assets, is on the verge of a deal to merge ML's respiratory drug development business with another group. The hope is this will crystallise the portfolio's value at higher than the current ML share price.

Perhaps it will, and the fabled "men with dark glasses" who punt small-cap stocks are ready to sell when they have turned their profit. Whether its core portfolio of cancer treatments will see it through beyond that is still a moot point. The shares, down 0.5p to 36.5p could prove lucrative for short-term gamblers.

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